A Sneak Peek At The Dividend Stars Of 2014

Investors are often asked to choose between one of these two types of yield plays. But it's not the right question to ask. Instead, you want to find stocks with fast-growing dividends that will eventually sport high yields.

But let's face it, so many companies in the S&P 500 were content to aggressively boost their dividends a few years back, and now seem to simply nudge the payout just a bit higher each year. Here are some examples:

Indeed, the outlook for dividend growth in the S&P 500 is likely to be much more muted in coming years, with earnings per share (EPS) growth -- not rapidly rising payout ratios -- becoming the prime determinant. But as with any rule, there are clear exceptions. Some companies appear poised for robust dividend growth in coming years, thanks to still-low payout ratios, and by the time the process is done, dividend yields (based on today's prices) are likely to be stellar.

Roughly a decade ago, when demand for airplanes began to surge, this aircraft maker decided to give the dividend a solid boost, as it rose roughly 20% in 2004, 2005 and 2006. By 2007, the payout grew just 15% (to $1.45 a share) and over the next half decade, it rose at just a 4% compound annual growth rate.

But Boeing is firing on all cylinders these days, as I noted a few months ago. As I wrote then: "Boeing is lavishing more attention on buybacks, with a current plan calling for $1.5 billion to $2 billion in further buybacks underway. But as the shares rise higher, buybacks make less sense, so Boeing may look to more aggressively boost its dividend in coming years."

To get a sense of the dividend potential, you can look at free cash flow. Boeing generated just $2.3 billion in free cash flow in 2011, though that number is expected to hit $6.7 billion this year and more than $8 billion a year by 2015, according to FactSet. That works out to be more than $10 a share in free cash flow by then. Simply put, Boeing can double the dividend to around $4 a share and still leave billions of free cash flow aside to pay down debt.

I have longmaintained that Ford is one of the world's most impressive automakers and one of the most underappreciated corporate turnarounds in the modern era. My view is dimming a bit, simply because I think other global automakers are now also making considerable strides in terms of product development and financial statement management.

Yet there's no questioning that Ford is poised for great dividends in the years ahead. After repairing its balance sheet, Ford offered up a modest payout in 2011, after a five-year period without dividends. The dividend was hiked to $0.20 in 2012, $0.40 this year, and by my math, could exceed $1 by 2015 or 2016.

That view again stems from free cash flow, which is likely to surge from $800 million last year, to $3.4 billion this year, to nearly $7 billion next year, according to Merrill Lynch. The big spike is partially attributable to the completion of a long period of high capital spending that modernized every aspect of Ford's production process.

They key takeaway: Ford's debt levels are now down to targeted levels, the company's pension is getting replenished, and much of Ford's future free cash flow can drop down to the dividend.

There's a good reason that this global casino operator has been gun-shy about its dividend. The financial crisis of 2008 led to a deep slump at its Las Vegas' facilities, and a bold expansion into Macau sapped any cash that was lying around.

A half-decade later, Vegas is buzzing again, and all those dollars earmarked toward Macau are now delivering great returns. Just as important, capital spending is back in check: It exceeded $3.5 billion in 2007 and 2008, more than $2 billion in each of the next years, and now has moved below $1.5 billion.

Now, the dividend is getting ample attention. Las Vegas Sands had suspended it back in 2004, but reinstituted it in 2012 at $1 a share. Now, it's up to $2 a share and could hit $3 a share in a few years. Why's that? Because the current dividend "could be financed entirely from Macau subsidiary in our view," note analysts at UBS, implying that the Vegas casinos could support additional dividend coverage.

The casino operator is focusing on both buybacks and dividends. Every month, another $75 million in shares will be bought, or $900 million a year. All the excess cash flow is likely to go in support of ever-higher dividends.

Analysts at Merrill Lynch suggest that the company has paid off too much debt, and may look to take on fresh debt to give those buyback and dividend plans a boost. They "believe there is room to 1) increase the buyback program further, 2) increase the recurring dividend further, and 3) consider special dividends, even while staying focused on new growth opportunities globally."

Risks to Consider: Companies tend to quickly shift course regarding dividend policy if they see the economy cooling. Subpar economic growth in 2014 (relative to current forecasts) would likely lead many companies to merely hold the line with their current dividends.

Action to Take --> Although many companies have been focusing on both buybacks and dividends, a fast-rising stock market makes buybacks less sensible. As a result, expect a slight shift toward dividends in 2014, and for companies with still-low payout ratios, the dividend may grow at a rapid clip.

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